Electronic Exchanges

Electronic Exchanges

Volumn , Issue , 2009, Pages

  Gorham, Michael ^a   Singh, Nidhi ^b  

^a ILLINOIS INSTITUTE OF TECHNOLOGY   (United States)

^b Goldman Sachs Group   (United States)

Author keywords

[No Author keywords available]

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EID: 85014174066     PISSN: None     EISSN: None     Source Type: Book    
DOI: 10.1016/B978-0-12-374252-0.X0001-9     Document Type: Book

References (502)

1. Capitalism, Socialism and Democracy, New York: Harper, 1975 [orig. pub. 1942], pp. 82-85.
2. Though we generally refer to all trades as buying and selling, the world is a bit more complicated. Many derivatives instruments are actually contracts two parties enter into, committing to do something at some time in the future. For example, a person might say that she bought cattle futures, but this is shorthand to mean that she entered into a contract to buy a truckload of cattle six months from now. She did not buy a futures contract; she entered into a futures contract. Both parties posted a performance bond (a.k.a. margin), but the buyer made no payment to the seller.
3. Richard J. Teweles, Edward S. Bradley, and Ted M. Teweles (1992), The Stock Market, 6th ed., p. 97.
4. The model described here is a generic floor-trading model. There are some variations between exchanges across asset classes. For example, there are no specialists on the futures trading pit, whereas every stock at the New York Stock Exchange traditionally has an assigned specialist who tracks all the orders and matches them based on the time the order was received.
5. Exchanges had slightly different variations on the type of trade cards used. Some were paper and some were cardboard.
6. Each floor trader and floor broker wore a jacket with a badge that indicated a three- or four-letter acronym. These were linked to the trader or broker's full name or full firm name. Badges displayed two pieces of information: trader name and clearing firm number, which were utilized for trade processing.
7. Each pit had one or more specialists who were responsible for matching the orders received from the pit traders and brokers.
8. The actual delivery varies from product to product. Though the delivery might sometimes be arranged through the exchange, often it is handled between the matched buyer and seller, who send evidence of the delivery to the exchange. The exchange becomes involved only if there is a problem. The CME lumber contract is an example where the buyer and seller make arrangements directly with one another.
9. Over-the-counter (OTC) markets are largely unregulated, and the concept of central counterparty clearing does not exist in the OTC trading.
10. The Stock Market: A Look Back http://www.investopedia.com/articles/basics/06/alookback.asp.
11. Economides Nicholas The Impact of the Internet on Financial Markets http://129.3.20.41/eps/fin/papers/0407/0407010.pdf.
12. Bloomberg terminals were installed throughout the floor. These were the first computer applications developed to provide exchange floor market information over computers.
13. The Stock Market: A Look Back http://www.investopedia.com/articles/basics/06/alookback.asp.
14. Technology Transforms the Financial Markets," Tim M. Guildmann, SunGard. World Bank: Sovereign Debt Management Forum, November 2, 1999.
15. Nasdaq started as an OTC market, not as a traditional regulated exchange.
16. At first, Nasdaq served as a bulletin board that showed all the current bids and offers. It connected the buyers and the sellers much later.
17. Discount brokers are generally brokers who offer lower commissions on trades and provide no investment advice. Ameritrade or E*Trade are examples of discount brokers.
18. http://www.computerworld.com/networkingtopics/networking/story/0,10801,75259,00.html.
19. Optionsmäklarna.
20. As we discuss in detail in later chapter, DTB listed LIFFE's flagship product, Bund, eventually stealing Bund away from LIFFE.
21. http://www.nymex.com.
22. We explore this concept in greater detail in later chapters. In a simple definition, the computer screens allowed traders to essentially view all products on a single computer screen. The trader could even see all the products across multiple exchanges on a single computer screen. Generally, traders would pick and choose the products they are interested in trading or monitoring, and the front-end trading application would display those products on the traders' computer screens.
23. Chapter 6 discusses details of the electronic infrastructure at the exchanges.
24. Extensible Markup Language (XML) is a computer language that allows users the flexibility to define various elements of financial data that needs to be shared across systems.
25. First electronic options markets.
26. This is the key short-term interbank reference rate known in Spanish as the Tasa de Interés Interbancaria de Equilibrio, or interbank equilibrium interest rate.
27. Barboza David In Chicago's Trading Pits, This May Be the Final Generation August 2000. http://query.nytimes.com/gst/fullpage.html?res=9901E7DD153CF935A3575BC0A9669C8B63%26sec=%26spon=%26pagewanted=print.
28. The Securities and Exchange Commission three-volume Special Study of the Securities Markets was presented to Congress in 1963 and called for a cleanup of the OTC market to make it more efficient and transparent via the electronic dissemination of quotes and possibly even electronic matching. SEC Chairman William Casey then worked with the National Association of Security Dealers to get the Special Study's recommendations implemented. See Mark Ingebretsen, Nasdaq: A History of the Market That Changed the World, Roseville, CA: Prima Publishing, 2002, p. 48-61 and 68-71.
29. Unless otherwise indicated, details in this section are taken from Patrick Catania, "Electronic Trading: A Brief History," in Patrick L. Young (editor), An Intangible Commodity: Defining the Future of Derivatives, Kent, England, erivatives.com Publishing, 2004, p. 51-55, and from discussions with Patrick Catania, who was an employee of INTEX during the period referenced.
30. Trading ahead of the customer or front running is a violation of the Commodity Exchange Act. A typical example is where a broker receives a very large market order from a customer. Knowing the execution of the order will move the market, the broker first takes a small position for himself, then executes the customer order, which moves the market in a way that favors the broker's position, then offsets his own position to take a personal profit. There are two things wrong with this system. First, the broker was dealing on information known only to him. Second, by taking his own position, the broker got favorable prices that should have gone to his customer.
31. quot;Electronic Exchange for Futures, Intex, Opens in Slow Trading,"Wall Street Journal, October 26, 1984, p. 1.
32. quot;Telerate and Intex Plan Trade System for Commodities,"Wall Street Journal, March 2, 1989, p. 1.
33. Much of the information in this section relies on a telephone conversation with Greg Boland, currently with Goldman Sachs in New Zealand but a key player in the team that developed the New Zealand Futures Exchange.
34. Optionsmaklarna.
35. In 1984, the CBOE introduced its Retail Automatic Execution System (RAES) for the electronic matching of small retail orders of 10 contracts or fewer in the most active options. CBOE History at.
36. http://www.cboe.com/AboutCBOE/History.aspx.
37. Wall Street Journal, November 18, 1988.
38. Wall Street Journal, November 18, 1988.
39. Financial Times, January 11, 1988, p. 15.
40. Material in this section is largely taken from Edna Carew, National Market National Interest: The Drive to Unify Australia's Securities Markets, Crows Nest, Australia: Allen & Unwin, 2007, p. 119-120.
41. Otto E. Nageli, "SOFFEX: How Switzerland Helped Change the World," in Patrick L. Young (ed.), An Intangible Commodity: Defining the Future of Derivatives, Kent, England, erivatives.com Publishing, 2004, p. 41. This section draws heavily on Nageli's account of events at SOFFEX.
42. Jorg Franke, "It All Began at Burgenstock," in Patrick L. Young (ed.), An Intangible Commodity: Defining the Future of Derivatives, Kent, England, erivatives.com Publishing, 2004, p. 16. This section draws on Franke's account of the creation of DTB.
43. quot;The Top 10 Financial Technology Innovators of the Decade,"Wall Street Technology, December 8, 1999.
44. Jorg Franke, p. 18.
45. The process whereby foreign electronic exchanges that wanted access to the U.S. market were given it began with the DTB and continued over the years with a number of other foreign exchanges. It was not exactly a permission, but rather a "no action letter," which was issued by CFTC staff and stated that the staff would take no enforcement action against the petitioning exchange as long as it continued to comply with the guidelines of the program.
46. An API is a set of functions, procedures, methods, classes or protocols that is used by a software program to request another software to perform a task.
47. Information taken from phone conversation with Russell Loubser, CEO, JSE Securities Ltd., May 31, 2007; Securities Week, August 28, 1989, p. 10, and a visit to SAFEX in 1994.
48. On October 19, 1987, there was a dramatic crash of stock markets throughout the developed world. The Dow Jones Industrial Average (DJIA) fell 24%-the second largest one-day drop in U.S. history.
49. Information in this section is taken from Xueqin Wang and Michael Gorham, "The Short, Dramatic History of Futures Trading in China,"Journal of Global Financial Markets, email conversations with Xueqin Wang, Chief Economist, Zhengzhou Commodity Exchange, and Jufeng Zhao, Department of Futures Supervision, China Securities Regulatory Commission.
50. Limited liability corporate entities use different designations in different countries-Inc. in the United States, Ltd. in the United Kingdom, SA in Spanish-speaking countries, and NV in the Netherlands, where Euronext is incorporated.
51. Silvia Ascareli, "France's MATIF Adds Electronic Market in Derivatives to Its Open-Outcry Pits,"Wall Street Journal, April 7, 1998, p. 1.
52. quot;MATIF Probes July Glitch,"Futures, September 1998, p. 12.
53. quot;Not My Fault,"Futures, December 1998, p. 12.
54. quot;Departure of David Kyte Signals Shakeup at LIFFE,"Financial Times, March 30, 1998, p. 24.
55. Unless otherwise noted, the details of the GLOBEX story are taken from Leo Melamed with Bob Tamarkin, Leo Melamed: Escape to the Futures, New York: John Wiley, 1996, p. 331-339, and from one of this book's author's observations during his time at the CME.
56. quot;Mother" in the sense that it was the biggest, capturing over 90% of all stock index futures trading in the United States. The first stock index futures contract was actually the Value Line index at the Kansas City Board of Trade, which started a few months before the S&P 500, in 1982.
57. It helped that the CME was one of the three owners on OneChicago, along with the CBOT and the CBOE.
58. Leo Melamed, Escape to the Futures, p. 339.
59. Howard Simon, "CBT Computer System Seen Setting Standards,"Journal of Commerce, March 17, 1989, p. 9A.
60. Leo Melamed, Escape to the Futures, p. 411-412.
61. Leo Melamed in Escape to the Futures, p. 412, says no, but others involved in the process have privately said yes.
62. Technically, the competition was between LIFFE and Frankfurt-based DTB, which later merged with Swiss-based SOFFEX and changed its name to Eurex.
63. quot;NYBOT Members Approve Deal,"Wall Street Journal, New York, December 12, 2006.
64. Small time gaps between the establishment of an exchange and start of total screen-based trading should not necessarily be interpreted as cases where the exchange started with a floor, then converted. It is typical to first start and register the exchange and then go to work building the systems to support the trading. There can be a gap of months or years between the founding date and first trading date. For example, the National Stock Exchange of India was legally established in 1992 but did not see its first trading till 1994, and that trading was screen-based out of the box.
65. William Christie and Paul Schultz, "Why Do Nasdaq Market Makers Avoid Odd-Eighth Quotes?"Journal of Finance, Vol. 49, No. 5, December 1994.
66. The Level 1 screen shows only the highest bid and lowest ask for a stock. Level 2 shows all the bids and asks for a stock. Level 2 also shows the recently executed orders.
67. One of the most significant challenges was NYSE Rule 390, which prevented NYSE members from routing their order flow to ECNs and other alternative trading systems.
68. Demutualization of the exchange referred to the move from member-owned organizations to stockholder-owned, for-profit corporations.
69. Hamilton, "New Electronic Networks Push Big Changes at NYSE, Nasdaq,".
70. July 30, 1999. http://articles.latimes.com/1999/jul/30/business/fi-60957.
71. Nasdaq currently owns INET (merger of Instinet and Island) and Brut. The NYSE acquired Archipelago, one of the largest ECNs.
72. Nasdaq purchased the Instinet electronic trading platform. The Instinet's brokerage division was bought by Silver Lake Partners, and Instinet's institutional trading division was purchased by the Bank of New York. Matthew Goldstein, "Nasdaq Grabs Instinet ECN,".
73. April 22, 2005. http://www.thestreet.com/markets/matthewgoldstein/10219371.html.
74. quot;NYSE Gets Regulatory Approval for Hybrid Expansion,".
75. December 6, 2006. http://www.finextra.com/fullstory.asp?id=16238.
76. quot;NYSE Can Forget the Hybrid,".
77. October 28, 2007. http://www.nypost.com/seven/10282007/business/nyse_can_forget_the_hybrid.html.
78. This section is drawn from Edna Carew's book on the building of a national Australian exchange out of six regional exchanges: National Market National Interest, Crow's Nest, Australia, 2007, Chapter 10.
79. U.S. Congress, Office of Technology Assessment, "Trading Around the Clock: Global Securities Markets and Information Technology," OTA-BP-CIT-66, July 1990, p. 44.
80. U.S. Congress, Office of Technology Assessment, "Trading Around the Clock: Global Securities Markets and Information Technology," OTA-BP-CIT-66, July 1990, p. 44.
81. Heather Timmons, "A London Hedge Fund That Opts for Engineers, Not M.B.A.'s,".
82. (August 18, 2006). http://www.nytimes.com/2006/08/18/business/worldbusiness/18man.html?ex=1313553600%26en=b2fee1b41c85af15%26ei=5088%26partner=rssnyt%26emc=rss.
83. quot;GlobalRisk Firm Risk,".
84. http://www.globalrisk.com/firmrisk.
85. Developed by GL Trade, the majority interest of which is owned by SunGard.
86. Developed by GL Trades, the majority interest of which is owned by SunGard, GL RIMS.
87. http://www.sungard.com/financialsystems/brands/glrims.aspx.
88. Generally referred to as green screen.
89. quot;CBOE Hybrid®, The Hybrid Trading System,".
90. https://www.cboe.org/hybrid/default.aspx.
91. quot;CBOE Receives SEC Approval to Launch CBOEdirect HyTS, The Hybrid Trading System,".
92. (June 12). http://www.cboe.com/AboutCBOE/ShowDocument.aspx?FILE=06-02-2003.doc%26DIR=ACNews%26HEAD=CBOE+News+Releases%26SEC=7.
93. HyTS provides access to only U.S. equity options, whereas the ISVs' single screen could provide access to markets around the globe.
94. On the floor there is no such thing as anonymity. For example, if a trader wants to trade a large order, others will find out and increase the price; therefore the buyer would not get the best price.
95. At the time, matching at the exchange was continuous, and orders were matched as they were submitted.
96. Dark books, also called dark liquidity or dark pools, are trading networks used by large institutional investors for their large orders. This is also known as the upstairs market.
97. The Industry Standard.
98. http://findarticles.com/p/articles/mi_m0HWW/is_42_3/ai_66672877.
99. quot;JP Morgan Launches 'Dark Book' Algorithms,".
100. (September 8, 2006). http://www.finextra.com/fullstory.asp?id=15828.
101. Making a market means standing ready to buy and sell at a bid price and ask price for a specific number of contracts or shares. On traditional floor-based exchanges, scalpers did this voluntarily to earn the profit, which was the difference between the bid and the ask. On stock exchanges with specialists, these specialists were required to make a market. On the NYSE, each stock had a single specialist whose job was to maintain an orderly market in that stock. On the Nasdaq, each stock typically had several competing market makers, obligated to post bids and offers. And as the derivatives exchanges grew larger and especially as they became electronic, the exchanges would engage firms as market makers who would either be paid or receive discounts on fees as compensation for making markets. The CME, CBOT, LIFFE, Eurex, and many other derivatives exchanges have had official market markers who were compensated for their services. The options exchanges had designated market makers for each option.
102. Before demutualization, the members of the CBOT directly elected their chairman, whereas the members of the CME elected the board, which in turn elected the chairman.
103. Live Cattle futures began in 1964 and received the name because the contract required delivery of live animals. Until that time there had been futures contracts on dead animals (such as iced chickens) or animal products such as butter, cheese, and pork bellies, but never on live animals.
104. Urad and tur are lentils, a staple in India.
105. At the time of the second ban, which was to tentatively last four months, unless there was a vote to extend the ban, the four products banned earlier remained under the ban.
106. Two days before the 2008 ban, Finance Minister P. Chidambaram said, "If rightly or wrongly people perceive that commodities-futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice," in an interview with Bloomberg Television in Madrid, May 4, 2008. He added, "The pressure is to suspend a few more food articles.".
107. http://www.bloomberg.com/apps/news?pid=20601080%26sid=aZMFidg5paZI%26refer=asia.
108. To become a member of one of these member-owned exchanges, a person must do two things: first, purchase a seat from an existing member. Each exchange operates a market in its seats, posting bid and offer prices, and there are almost always people willing to sell a seat. Second, apply to the exchange to become a member and the exchange will decide whether the applicant is worthy to join. At the CME, this was done via a vetting by the Membership Committee and a recommendation from this committee to the board, which had to approve all new members. Rule 102 of the CME Rulebook, for example, allows that "any adult of good moral character, reputation and business integrity, with adequate financial resources and credit to assume the responsibilities and privileges of membership is eligible for membership in the Exchange.".
109. The principal/agent problem, a term from political science and economics, refers to the problem in corporations and other organizations that when principals (owners) hire agents (managers and staff), the interests of both are not aligned, and it is sometimes difficult for the principals to know what the agents are really doing. With the members working in the same building with exchange staff, it's much easier to keep an eye on them.
110. The national regulators include the SEC (securities) and CFTC (futures and options on futures) in the United States and the SFA in the United Kingdom. Canadian markets are largely regulated by the province in which they reside, and German exchanges by the state in which they reside. So the Autorité des marchés financiers (AMF) in Quebec regulates the Montréal Exchange, and Eurex is regulated by the German State of Hesse.
111. An extensive treatment of this unfortunate episode can be found in David Greising and Laurie Morse, Brokers, Bagmen and Moles: Fraud and Corruption in the Chicago Futures Markets, John Wiley and Sons, 1991.
112. Some exchanges have been putting some non-members on disciplinary committees for decades.
113. Ajay Shah and Susan Thomas, "David and Goliath: Displacing a Primary Market,"Journal of Global Financial Markets, 1(1): pp. 14-21 (Spring 2000c).
114. For example, NYMEX acquired COMEX; the CBOT acquired the MidAmerica Exchange and the New Orleans Rice and Cotton Exchange; and a group of exchanges combined to form the Coffee, Sugar, and Cocoa Exchange, which later became NYBOT.
115. FIBV is Federation Internationale des Bourses de Valeurs, a world association of stock exchanges.
116. On October 2000, the Minister for Financial Services and Regulation raised the ownership limit on the Australian Stock Exchange to 15%, noting that any investor wanting to acquire more than 15% would have to apply to the minister and might be approved if such a share was deemed to be in the national interest.
117. http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2000/065.htm%26pageID=003%26min=jbh%26Year=2000%26DocType=0.
118. There is at least one exception. In March 2000, the CFTC approved a proposed cattle futures and options market called FutureCom, which was owned by a single Texas oilman in Amarillo. The exchange never opened for business. In some cases the ownership was indirect. For example, when the Coffee, Sugar, and Cocoa Exchange (CSCE) was combined with the New York Cotton Exchange (NYCE) to create NYBOT, the members of the two exchanges owned NYBOT, which in turn owned CSCE and NYCE. The currently inactive exchange known as the Cantor Fitzgerald Futures Exchange (CFFE) was wholly owned by an entity called CFFE Regulatory Services, which in turn was owned 10% by the NYCE and 90% by NYCE members. And because there have been a lot of exchanges historically on which we don't have ownership information or even names of all of them, we can't be certain that all were member-owned. Thanks to Riva Adriance at the CFTC for this clarification.
119. These are the three major membership divisions of the Chicago Mercantile Exchange. CME stands for Chicago Mercantile Exchange, IMM for International Monetary Market, and IOM for Index and Options Market. Each of these allows trading in fewer products than the one preceding it. Percentage of seats leased taken from a letter to Paul O'Kelly, General Counsel of the CME, from the Federal Elections Commission Advisory Opinion Number 1997-5, May 16, 1997.
120. http://herndon1.sdrdc.com/ao/no/970005.html.
121. Technically, the term is a designated contract market, or DCM, when the CFTC accepts an entity's application to become a full-fledged traditional futures exchange. There are also more lightly regulated versions of exchanges, but trading on the lesser regulated exchanges is restricted to large sophisticated participants.
122. Doug Cameron, "CME to List Solely with Nasdaq,"Wall Street Journal, July 1, 2001.
123. http://online.wsj.com/article/SB121485998670417207.html.
124. The Growth and Emerging Market (GEM) Division was created to trade a group of contracts based on the currencies, stock indices, and debt instruments of the major emerging markets around the world. The project was controversial and the contracts have been relatively unsuccessful. The GEM member is allowed to trade only five relatively low-volume contracts (three currencies and two indexes): the Mexican peso, Brazilian real, South African rand, and GSCI and Russell indexes.
125. At the time of demutualization, there was a waiting period before shares could be sold.
126. Four different Class B shares were created: Class B1, Class B2, Class B3, and Class B4, which differed from each other only in voting rights because they were associated respectively with the four membership divisions: the CME, the IMM, IOM, and the GEM.
127. quot;Amended and Restated Certificate of Incorporation of Chicago Mercantile Exchange Holdings Inc." April 19, 2002, p. 12. Not all members are equal, so when voting on changes to core rights, each CME member gets three votes, each IMM member gets two votes, each IOM member gets one vote, and each GEM member gets 1/6 of a vote. And when voting for directors, of the 20 board members, CME members elect three, IMM members elect two, IOM members elect one, and GEM members elect none. So the members, who might hold nothing other than the single B share associated with their membership, elect 30% of the directors, a pretty heavy influence.
128. Securities Industry News, March 29, 2004.
129. United States Securities and Exchange Commission, NYMEX Holdings, Inc., Form 10-K, for the Fiscal Year Ended December 31, 2005.
130. Lynn Cowan, "The Buzz: NYMEZ More Than Doubles in Its Opening Day of Trading,"Wall Street Journal, November 18, 2006.
131. Christine Marie Nielsen, "CBOT Raises Price Range for IPO, Move Sparks Optimism About Potential Success of Deal,"Wall Street Journal, September 17, 2005.
132. Raymond Hennessey, "Commodities Report: Chicago Merc's IPO Hits This Week-As First Major US Market to Go Public, the Exchange Beats NASDAQ and NYSE,"Wall Street Journal, December 2, 2002.
133. The New York Futures Exchange was a wholly owned subsidiary of the New York Stock Exchange and was the NYSE's first attempt to get into futures. Though this attempt was unsuccessful and the exchange was sold to NYBOT, the NYSE eventually (in 2007) merged with Euronext, which had already acquired the big London-based futures exchange known as LIFFE, so the NYSE finally had a successful futures business.
134. This explanation is based on discussions with Galen Burghardt, Rick Kilcollin, and Steve Youngren, all of whom were at the CME at the time, though if there are any errors, they are my own.
135. Federal Deposit Insurance Corporation, "Managing the Crisis: The FDIC and RTC Experience 1980-1994," Washington, D.C., August 1998, p. 547.
136. http://www.fdic.gov/bank/historical/managing/history2-04.pdf.
137. The NYSE, for example, as of the end of 2008 charged between $150,000 and $250,000 to list a new company.
138. R. C. Michie, The London and New York Stock Exchanges, 1850-1914, HarperCollins, 1987, p. 167, quoted in John C. Coffee, Jr., "Racing Towards the Top; The Impact of Cross Listings and Stock Market Competition in International Corporate Governance,"Columbia Law Review, Vol. 102, pp. 1757-1831.
139. Natasha de Teran, "Fungible Contracts Back on the Agenda," Dow Jones Online Financial News, June 16, 2003.
140. CBOT member Dan Brophy commenting on FIA president John Damgard's letter on fungibility to the Wall Street Journal; in the John Lothian Newsletter Blog, April 30, 2007.
141. http://johnlothiannewsletter.com/phpbb/viewtopic.php?p=571.
142. Network effects is a term used by economists to refer to those situations in which the value of one person being connected to a network (such as a telephone exchange, a social network Web site, or a market, for example) grows as more members join the group. Elsewhere in this book, we also refer to the end game of this effect as liquidity-driven monopoly.
143. The CME experienced a one-day drop of 6%, from $619 on Monday, February 4, 2008, to $588 the following day. While other factors, especially declining confidence in all financial companies, began to affect the stock price, the decline continued down to $461 by early March, $378 by early June, $295 by early July, and $251 by late October.
144. Information on the creation of the ISE is taken from conversations with David Krell and the following Harvard Business School Case Study: George Chacko and Eli Peter Strict, "The International Securities Exchange: New Ground in Options Markets," Harvard Business School, 9-203-063, June 6, 2003.
145. CBOE Annual Report, 2001.
146. Options on U.S. futures contracts are traded at U.S. futures exchanges, which generally have their own clearinghouses. So, options on S&P 500 futures contracts are traded at the CME and cleared by CME Clearing, whereas options on the S&P 500 stock index are traded at the CBOE and cleared at the OCC.
147. Unless otherwise stated, all statistics in this paragraph are taken from the Options Clearing Corporation Annual Report, 2007, p. 14.
148. Several futures exchanges had introduced index options earlier.
149. The CBOE first created its own index, the CBOE 100, which was renamed in late 1983 the S&P 100.
150. Chicago Board Options Exchange, Incorporated Fees Schedule, August 1, 2008. The fees are quite complicated and depend on both product and type of trader. In addition, exchanges must pay index providers a fee for the use of their product, so the cost of offering an index product is greater, though because the deals are private the amount of the payment is not public.
151. An exchange-traded fund, or ETF, is an instrument that trades like a stock but is a basket of stocks that tracks some index. The first U.S. ETF was the Spider (SPDR) listed at the American Stock Exchange.
152. Mark Longo, "Tussle over Index Options: ISE Challenges CBOE's Proprietary Index Offerings in Lawsuit,"Traders Magazine, January 1, 2007.
153. The CME and SIMEX developed a mutual offset system whereby for Eurodollar futures, a position could be put on at SIMEX, then offset later on the CME. This system lent liquidity to SIMEX's market.
154. Thanks to Nick Ronalds, currently Managing Director, FIA Asia, and President, Rho Financial, and former Director of CME's office in Tokyo, for clarification on Japanese regulations.
155. Cash settlement avoids the physical delivery of the underlying asset in the case of futures contracts. It is poorly named because it suggests that one party is giving the other one a big wad of cash in lieu of handing over the physical commodity. In fact, cash settlement is best understood by starting with the fact that in futures markets, at the end of every day, all contracts are marked to market, meaning that based on the closing price in the futures market for that day, all accounts that have lost money have funds transferred into all the accounts that made money. This marking to market occurs every single day, based on the closing, or settlement, price in the futures market. When contracts such as stock index contracts are cash settled, this simply means that on the last day of trading there is one additional and final settlement of accounts, based this time not on a futures price but on the cash price in the marketplace. This technique is used whenever physical delivery is impossible or very expensive.
156. Most stock indexes are capitalization weighted, which means that the effect of a change in a stock's price depends on the market capitalization of that stock. For example, a 10% increase in Microsoft has a bigger effect on the S&P 500 than a 10% increase of the stock in a much smaller company, because the S&P 500 is capitalization weighted. The Dow Jones Industrial Average and the Nikkei 225 are simple averages, sometimes called price-weighted indexes, where company size doesn't matter. In the price-weighted index, a 10% increase in a stock price will have a greater effect on the index the higher the stock price is, even if the company is a small one.
157. MSCI used to stand for Morgan Stanley Capital International but is now known as MSCI Barra. It has been publishing indexes for over 35 years and has had strong brand recognition.
158. quot;Ferscha's Leap,"The Economist, January 18, 2003.
159. Thanks to John McPartland for clarifying this.
160. Joseph Weber, "Chicago, Afraid of a Little Competition?"Business Week, November 24, 2003, p. 111.
161. Sarah Rudolph, "Eurex US Files Second Complaint Alleging Chicago Exchanges Continue to Monopolize Market,"Securities Week, April 4, 2005, p. 6.
162. Sarah Rudolph, "Court Denies CBOT/CME Motion to Dismiss Eurex US Antitrust Suit,"Securities Week, August 29, 2005, p. 1.
163. Peter A. McKay, "Futures Exchanges Are Sued by Eurex on Antitrust Claims,"Wall Street Journal, October 15, 2003, p. C1.
164. Satish Nandapurkur, Speech at FIA Chicago Luncheon, July 29, 2004.
165. http://www.futuresindustry.org/downloads/divisions/chicago/EurexUS_Speech_July-29-04.pdf.
166. In fact, the first trades were in cash and derivatives contracts based on precious metals.
167. ICE also has ICE Services and ICE Data, but these are not relevant to the story of the ICE-NYMEX competition.
168. Nina Metha, "SEC Weighs Access to Foreign Marts,"Traders Magazine, August 2007, p. 26.
169. Luke Jeffs and Tom Fairless, "Turquoise pioneer relishes the competition," Dow Jones Financial News Online, Nov. 17, 2008.
170. http://www.efinancialnews.com/assetmanagement/pensionfunds/content/3352490930.
171. Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, and Morgan Stanley.
172. Data was available only through June 2008 at the time this was written in midsummer 2008. We have projected the full 2008 volumes by doubling the January through June numbers of 20 million contracts for soybeans, 11 million for wheat, and 33 million for corn.
173. The blockbuster equity index contract in recent years has actually been the E-mini S&P 500, a sort of Mini Me clone which is identical, but only one-fifth the size of the regular S&P 500. While the original S&P 500 started in 1982, the E-mini was launched in 1997.
174. http://www.world-exchanges.org/WFE/home.asp?menu=191%26document=535.
175. Algorithmic trading means trades executed by a computer software program with little or no human intervention, generally based on price and volume information fed real time into the program. Black-box trading has no real human intervention once the program is written; gray-box trading has some human intervention. This topic is discussed more extensively in a later chapter.
176. One was the MidAmerica Commodity Exchange, which acted as a training ground for traders by listing smaller clones of contracts traded on the big exchanges, like grain contracts that were one-fifth the size of CBOT grain contracts. The other was the Chicago Rice and Cotton Exchange (formerly the New Orleans Commodity Exchange, which moved to Chicago and changed its name). Technically, the MidAm absorbed the Chicago Rice and Cotton Exchange just before merging into the CBOT.
177. The first telegraph was developed in 1844, and until the 1877 development of the telephone, all long distance communication was via telegraph. The first ticker-tape machine, which was essentially a printer to print out stock symbols and their price changes sent by telegraph, was developed in 1867 by Ed Callahan of the American Telegraph Company. Two years later Thomas Edison came out with the Universal Stock Ticker, which could print at the blazing speed of one character per second. The ticker tape was used until the 1960s, when it was supplanted by the computer. But even at its most efficient, stock quotes via ticker tape were typically delayed by 15 to 20 minutes.
178. Thanks to Ajay Shah for pointing out this example of resistance to consolidation.
179. In 1897, there were roughly 130 commodity exchanges, according to Zensaku Sano and Sentaro Iura, "Commodity Exchanges in Japan,"Annals of the American Academy of Political and Social Science, Vol. 155, Part 1: Organized Commodity Markets (May 1931), pp. 223-233.
180. These last two were actually merged into the Osaka Textile Exchange in 1984, but all the other mergers took place in 1992 or later.
181. So far, however, all the consolidation has been on the side of the physical commodities. There has been no consolidation among Japan's three financial exchanges, the Tokyo Stock Exchange, the Osaka Securities Exchange, and the Tokyo Financial Exchange, which used to be referred to as TIFFE. However, there has been some discussion of the Tokyo Stock Exchange taking over the commodity exchanges.
182. Coffee, Sugar, and Cocoa would later merge with the New York Cotton Exchange to become NYBOT, and NYBOT would later be taken over by ICE to become ICE Futures US. The early history of these combinations can be found in Allen B. Paul, "The Past and Future of the Commodities Exchanges,"Agricultural History, Vol. 56, No. 1, Symposium on the History of Agricultural Trade and Marketing, (Jan. 1982), pp. 287-305.
183. World Commodity Report, June 22, 1988.
184. quot;2 Exchanges Might Merge,"New York Times, January 25, 1990, section D, p. 8.
185. Sean Maloney, "Nymex/Comex Tie Up Off,"Lloyd's List, February 20, 1991, p. 2.
186. Adam Ryan, "Membership's Vote to Merge 2 New York Futures Markets,"New York Times, April 26, 1994, Section D, p. 1.
187. Thanks to Michael Frankel, Senior Vice President, Business Development and M&A at LexisNexis, and author of several books on M&A, for helpful conversations on this issue.
188. quot;NYSE Seat Holder Brings Class Action Against Exchange Directors Seeking to Block the Proposed Billion-dollar Merger with Archipelago," P. R. Newswire US, May 9, 2005, 7:37 p.m. GMT.
189. National Posts Financial Post and F. P. Investing, June 8, 2006, p. 10.
190. SEC form 425 filed by AMEX on June 17, 2008.
191. In the summer of 2008, as the merger was being finalized, AMEX had received notice that the New York City Landmarks Preservation Commission was considering whether the M. X. headquarters at 86 Trinity Place should be designated a landmark property. If it does become so designated, this will restrict the uses to which the property can be put and the changes that could be made in the property, and therefore negatively affect the price that any buyer would be willing to pay. In addition, New York City, like other U.S. urban markets, had been suffering downward pressure on property prices due to the fallout of the subprime crisis. All of this was disclosed to the AMEX members prior to their vote on the merger in a special letter to members on June 6, 2008, from the chairman and CEO of the exchange as well as the chairman of the AMEX membership committee.
192. quot;LSE Plan Would Blame Germans If Bourse Linkup Fails,"Irish Independent, April 22, 2000.
193. Mary Canniffe, "Challenging Times ahead for London Stock Exchange as Rivals Press Claims,"Irish Times, September 8, 2000.
194. Chicago Tribune, September 12, 2000.
195. Grant Ringshaw, "LSE and NASDAQ Seek Merger Concessions,"The Sunday Telegraph, June 2, 2002.
196. Robert Galbraith, "The Great Pan-European Stock Exchange Merger,"The Business, September 24, 2006.
197. quot;LSE Agrees to GBP 1 Bn Deal for Borsa Italiana,"Irish Independent, June 25, 2007.
198. quot;NASDAQ Threat to LSE on Borsa,"The Statesman (India), June 26, 2007.
199. LSE said that almost 100% of the votes cast said yes to the merger, and those votes represented 78% of issued share capital. Only a simple majority was required to execute the merger. On the Italian side, 99.92% of the votes supported the merger. Jane Wardell, "London Stock Exchange and Borsa Italiana Shareholders Vote in Favor of Takeover," Associated Press Worldstream, August 8, 2007.
200. Stanley Reed, "Nasdaq, Dubai, OMX in Global Tieup," Business Week Online, September 21, 2007.
201. Jim Kharouf, "The Deal of the Year,"SFO, Vol. 5, No 12, December 2006, p. 16-22.
202. quot;Chicago Mercantile Exchange Holdings Inc. Announces Meeting with Members and Shareholders of Chicago Board of Trade," P. R. Newswire US, March 20, 2007.
203. quot;CME and CBOT Agree to Increase Merger Offer," M2 Presswire, July 6, 2007.
204. ETFs seem universally to be traded on stock exchanges, but options are found both on stock exchanges and on specialized options exchanges such as the Chicago Board Options Exchange, the European Options Exchange, the International Securities Exchange (taken over by Eurex in 2007), and the Boston Options Exchange.
205. Some groups of futures contracts are almost clones of one another. For example, every currency contract at the CME is identical except for the name of the currency to be delivered (Euro, Japanese yen, British pound, Mexican peso, etc.) and the position limit (which is a much smaller number of contracts for the Mexican peso than for the Euro). So each new currency is mainly a matter of just picking another country and making arrangements with settlement banks.
206. For example, it does not take much work to list a new stock option. The design of any new individual stock option is virtually the same as every stock option that preceded it; the only thing that changes is the name of the company. So, though options as a product class certainly represent an innovation, the addition of one more equity option is not much different than the stock of one more company.
207. There are two sources of data on new futures products. The Futures Industry Association (FIA) has published volume data for all U.S. futures contracts since 1955 and international futures contracts since 1980 in its Monthly Volume Report. More recently, it has been publishing data on securities options as well. And the CFTC has made available on its Web site a list of every new product registered with the CFTC between 1922 and the present. We rely on both sources for information presented in this chapter.
208. Its 2007 merger with the CBOT and shift to largely electronic trading resulted in the CME selling its trading floors in 2008 and moving the remaining floor traders a few blocks away to the CBOT's sparsely populated floor.
209. While there were many board members involved, this effort was led by Executive Committee Chairman Leo Melamed and Board Chairman Jack Sandner, both energetic, enthusiastic, and charismatic leaders and speakers. They both could stimulate action by virtue of their personalities.
210. Despite the fear the NYSE's entry into the market struck in the CME's heart, the NYSE Composite futures contract and the NYSE's whole futures subsidiary were not successful and were later sold to the New York Cotton Exchange, which was itself merged into the New York Board of Trade, which later became ICE Futures US.
211. On May 16, 1972, the CME opened trading in seven foreign currencies (the British pound, German mark, Swiss franc, Italian lira, Japanese yen, Canadian dollar, and Mexican peso) within a separate exchange called the IMM, to build a separate brand image not associated with pork bellies, cattle, hogs, and other agricultural products.
212. To make the seat fractions useful even before assembling four of them into a full seat, the range of products one could trade expanded with each additional fraction one held. Though specific products varied across the membership divisions (CME, IMM, and AMM), the idea was that a person holding one-quarter seat could trade product A, with two quarters trade products A and B, with three quarters trade products A, B, and C, and with four quarters, which was a full seat, trade all products allowed to members in that division.
213. In fact, the CME does list both floor and Globex hours for most of its 18 weather contracts, so if traders wish to trade weather contracts on the floor, they can do so.
214. Not including the 81 electricity contracts that the CFTC classifies separately.
215. When one of the authors of this book was a research economist at the Chicago Mercantile Exchange, he spent almost a year researching and designing crude oil, gasoline, and heating oil futures contracts.
216. There's often confusion about exactly what cash settlement or financial settlement is. First, the terms mean the same thing. Second, cash settlement does not mean that there is a special delivery of the cash value of the contract, as some people seem to believe. It's easiest to think of cash settlement as simply one additional marking to market. Futures contracts are marked to market and every day, based on the price established during the close. For this reason the closing price in futures markets is actually called the settlement price. So every day, all buyers and sellers have their accounts debited or credited based on the settlement price established in the pit or in the electronic market during the closing. And in traditional futures contracts, anyone holding a position in a contract after the final bell on the last day of trading of that contract must, depending on the position, either deliver or take delivery of the underlying commodity. In cash-settled contracts there is no delivery, but there is one last settlement, one last transfer of funds from losers to winners, based not on the price established in the pit or in the electronic futures market but rather on a price that's established external to the exchange, typically in the cash market. The S&P 500 contract, for example, has a final settlement price based on the prices of the 500 stocks on the New York Stock Exchange. The Eurodollar contract has a final settlement price based on a survey that the British Bankers Association does of major banks in London that are involved in the Eurodollar market.
217. Throughout these charts, we include only futures contracts that have had some trading in them. Exchanges will often list contracts that attract no trading, but those are excluded from this analysis.
218. CBOT's first step into electronic trading was to develop Aurora, a joint venture with Apple, Tandem, and Texas Instrument. The project never went live. Project A was the first electronic platform to go live.
219. Moriyama, Ayumi, "Asian Traders Hope for CBOT Project Growth,".
220. (December 4, 1998). http://www.expressindia.com/news/fe/daily/19981204/33855054.html.
221. Kharouf, Jim, "Project A Spins Off,".
222. (August 1998). http://findarticles.com/p/articles/mi_qa5282/is_/ai_n24336071.
223. Moser, Mike, "CBOT Sees Edge with Eurex,".
224. (August 1, 1999). http://www.allbusiness.com/business-finance/equity-funding-stock/295465-1.html.
225. Moser, Mike, "CBOT Sees Edge with Eurex,".
226. (August 1, 1999). http://www.allbusiness.com/business-finance/equity-funding-stock/295465-1.html.
227. quot;CBOT and Eurex Hammer out New a/c/e Agreement,".
228. (July 11, 2002). http://www.finextra.com/fullstory.asp?id=6133.
229. Trader's order book contains orders specifically for that individual trader. It consists of all the orders submitted to the exchange by the trader.
230. CBOT required all the third-party vendors to store the order book locally on their trading system, which would allow traders to access the order book when the connection is regained.
231. North American Trading Host (NATH), the LIFFE Connect matching engine, was not launched until October, 2005, almost two years after the CBOT launch on the LIFFE Connect platform.
232. http://www.euronext.com/fic/000/010/645/106457.ppt.
233. Weber, Joseph, "Chicago Takes on Europe, A Newly Revitalized Chicago Board of Trade Is Fending off Eurex-for now,".
234. (July 5, 2004). http://www.businessweek.com/magazine/content/04_27/b3890096_mz020.htm.
235. Weber, Joseph, "Chicago Takes on Europe, A Newly Revitalized Chicago Board of Trade Is Fending off Eurex-for now,".
236. (July 5, 2004). http://www.businessweek.com/magazine/content/04_27/b3890096_mz020.htm.
237. EurexUS was planning to list U.S. Treasuries, CBOT's bread and butter for its initial launch.
238. Speech by EurexUS CEO Satish Nandapurkar at the FIA luncheon.
239. Weber, Joseph, "Eurex Blows into Chicago,".
240. (February 5, 2004). http://www.businessweek.com/bwdaily/dnflash/feb2004/nf2004025_6306_db016.htm.
241. Cross-margining is an agreement between two different markets or clearing organizations to set a lower net margin for a customer with positions at the two entities, which, when taken together, are less risky than either position in isolation.
242. IPE tried to launch a physically settled Brent contract in 1981 and tried to relaunch it as cash-settled in 1987. Both attempts failed to generate any significant liquidity.
243. Prior to EnronOnline, energy traders either traded on the floors of NYMEX and IPE or called each other to buy or sell energy contracts.
244. Bilateral agreements were required to handle the credit risk associated with trading OTC products. OTC products are unregulated products without a CCP the traders could turn to in case of default.
245. quot;Irresistible Force Meets Immovable Object,".
246. (Oct 2001). http://www.petroleum-economist.com/default.asp?page=14%26PubID=46%26ISS=8674%26SID=325717.
247. quot;CCorp Unveils ICE Alliance as Fed Mulls CDS Clearing Proposals,".
248. (October 10, 2008). http://www.sibosonline.com/fullstory.asp?id=19117.
249. The partnership allowed CME members to trade NYMEX products via the NYMEX ACCESS system and NYMEX members to trade on CME's GLOBEX system.
250. quot;NYMEX Sets Daily Volume Records for Natural Gas Futures on CME GlobexÂ(®),".
251. (January 31, 2007). http://nymex.mediaroom.com/index.php?s=43%26item=890%26printable.
252. Under the agreement, CCX pays a licensing fee of $725,000 and service fee of $500,000 annually. In addition, CCX also pays ICE for technology development cost required for CCX.
253. quot;An Excerpt from a DEF 14A SEC Filing, Filed by INTERCONTINENTALEXCHANGE INC on 3/30/2007,".
254. http://sec.edgar-online.com/2007/03/30/0000950144-07-002932/Section17.asp.
255. Orc Software is an independent software vendor that connects to global exchanges to provide a front-end trading application.
256. By limiting access by providing connectivity only through its own front end, SGX would lose market share because users trading through a single screen across multiple markets would not trade on SGX, since it would not provide them an integrated market view across multiple exchanges on a single screen.
257. Clark, Joel, "Co-location Services Grow While Exchanges Seek to Streamline Operations and Drive Down Latency,".
258. (April 1, 2008). http://db.riskwaters.com/public/showPage.html?page=788665.
259. quot;Feature: Colocation: A Game Worth the Candle?".
260. http://www.automatedtrader.net/feature-36.xhtm.
261. quot;ASX goes sub-millisecond with new co-location service,".
262. (July 4, 2008). http://www.finextra.com/fullstory.asp?id=18684.
263. Voyles, Bennett, "Co-Location Catches On,".
264. http://www.futuresindustry.org/fi-magazine-home.asp?v=p%26a=1190.
265. Voyles, Bennett, "Co-Location Catches On,".
266. http://www.futuresindustry.org/fi-magazine-home.asp?v=p%26a=1190.
267. One final thought. At this moment, the multiple financial powers-that-be are racing to provide further content to an internationally orchestrated revamping of regulation in time for the reconvening of the G-20 summit in April 2009. Rapid intervention, essential as it has been to prevent the downward spiral of the financial system taking the economy-and some have said modern economic theory-with it, may not be the best way to introduce reforms that may effectively redraw customer and prudential protections long in place, some of which worked extremely well during this period of extreme deleveraging and asset revaluation. Also the rush to change the puppeteers and the stage should not obscure the fact that getting the substance right is critical. And the approach to substance should be clear-sighted enough to see for example that the language of procyclicality, currently being drawn on by advocates of reducing required capital reserves, can be used for ill as well as for good. Finally, any review should take into account the resilience of markets and the value of the information they provide and take care not to adopt solutions that bias the competitive landscape.
268. See, e.g., Jerry W. Markham, "For Whom the Bell Tolls: The Demise of Exchange Trading Floors and the Growth of ECNs," ExpressO; available at.
269. (unpublished works; 2008). http://works.bepress.com/jerry_markham/1.
270. Often equity exchanges in particular are referred to as public utilities. In the United States, in fact, the fees charged for data production and dissemination by such exchanges were originally set by regulation and now still have maximum caps applied to them.
271. In 1975, when the U.S. legislature first considered a national market system for equity securities, Junius W. Peake and Morris Mendelsohn argued that a black-box approach to centralizing order flow was the fairest means of addressing customer protection, in particular best execution. See, e.g., Peake and Mendelsohn, "Whose Market Is It, Anyway? Intermediaries or Investors," Wharton School, Rodney L. White Center for Financial Research Working Papers, July 1994. Until 1993, the CFTC exchange-trading (concentration) requirement contained in Section 4(a) was construed to favor the central marketplace, and exceptions were narrowly construed (and various stratagems devised) to permit certain types of over-the-counter trading in swaps and financial forwards to be interpreted not to breach this general requirement. Of course, electronic technology not only made centralization possible, it also made niche markets possible and facilitated automated dealer transactions. The changes in technology that permitted further automation of various types of markets and transactions created a difficulty for regulators seeking to keep pace with innovation, to take sensible positions, and to nonetheless honor the relevant legal constraints.
272. IOSCO Internet Task Force Report on Securities Activities over the Internet, 1998. See especially Part IV: Key Recommendations, at paragraphs 14, 15, and 16.
273. http://www.iosco.org/library/pubdocs/pdf/IOSCOPD83.pdf.
274. BATS trading.
275. http://www.batstrading.com.
276. is an ECN formed in 2006 as a subsidiary of a technology company based in Kansas City, Missouri. BATS is now in the course of establishing BATS Europe. It trades up to 15% of Nasdaq volume. Electronic Liquidity Exchange (ELX) is a new dealer-owned futures exchange, announced in 2008 by Howard Ludnick, who had sponsored Brokertec; MCX is the Multi-CommodityExchange of India.
277. For example, India and China have studied other templates but created their own. This may be why the achievements of the Indian markets are quite substantial in that they tried to put together the needed infrastructure on the business side and to provide by contract what was not there by law, much in the manner of the old markets that preceded today's modern behemoths. See Corcoran, "The Uses of New Capital Markets: Electronic Commerce and the Rules of the Game in the International Marketplace,".
278. http://www.wcl.american.edu/journal/lawrev/49/corcoran.pdf?rd=1.
279. For example, cases related to the enforcement of the so-called Wagner patent, Trading Technologies business process case, and the NYMEX case against ICE attempting to claim that its settlement price for WTI crude was proprietary. See John Fazzio, "Financial Innovation Patents: The Future of Futures Markets or Old Wine in New Bottles" (14 March 2006).
280. Objectives and Principles of Securities Regulation, IOSCO Library, Public Document (1998) n. 1.
281. Office of Fair Trade (U.K.); Justice Department (U.S.); European Commission Competition Ministry. See also, for example, Core Principle 18 for Designated Contract Markets of the Commodity Futures Modernization Act of 2000 (CFMA).
282. See, for example, Corcoran and Lawton, The Journal of Futures Markets, Vol. 13, No. 2, 213-222, John Wiley & Sons (1993).
283. For example, today equities markets are commonly referred to as commoditized, that is, traded based on volatility and general market fundamentals to profit from volume and small "alpha" differentials through technical algorithmic trading models rather than specific risks, stock picking, or analysis. Capacity today is at a premium. At the New York Stock Exchange (now NYSE Euronext), the current transaction capacity of billions dwarfs the highest level of trading experienced in the 1987 crash, when the 800,000 shares traded effectively stopped trading; response time is now down to infinitesimal fractions of seconds. See, for a commercial example of the quest to eliminate and measure latency.
284. http://www.netqos.com/solutions/trade_monitor/index.html?gclid=CMzglvL21pQCFQVfFQodVSGYkA.
285. Screen Based Trading Systems for Derivative Products, IOSCO Library, 1990. The report accompanying these principles, though instructive, was distributed by IOSCO but never adopted, since the drafting committee participants could not agree as to the next level of granularity. Note that the original U.K. Financial Services Act of 1986 contained principles of market conduct, as did the first EU passporting directive, known as the Investment Services Directive of 1992.
286. See: Principles for Oversight of Screen Based Trading Systems for Derivatives Products, Additions, IOSCO, Library (October 2000). The additional four principles are:.
287. CFTC Screen No-Action Policy Statement, November, 2006; But see: July 8, 2008 amendments to no action position accorded to the Dubai Mercantile Exchange and to ICE UK.
288. These set forth basic high-level objectives of oversight of securities markets and market operators more generally, irrespective of medium of trading, including appropriate conditions of authorization, transparency, prevention of market abuses-such as manipulation and insider trading, assurance of financial integrity of participant, and clearing and settlement standards addressing finality and protection of customer funds.
289. CME-SIMEX mutual offset clearing system, initiated in 1984.
290. http://www.cftc.gov.
291. CME manages accessions to the companion agreement among exchanges to share relevant information about exposures and the like in various types of market events sufficient to determine the whole position (on multiple markets) of a particular trader.
292. The transition to electronic trading in the United States has been a long, drawn-out process, whereas in France and London, for example, the floor disappeared in almost a blink of an eye-in London, the dominant but floor-operated LIFFE folded to the Deutsche Börse's attempt to retrieve the bund contract in less than six months, and the floor of the MATIF disappeared overnight. Many of the current developments are the same on both sides of the Atlantic.
293. See the Petersen antispeculation bill (Commodity Markets Transparency and Accountability Act of 2008), a version of which was reintroduced in 1997-and Senator Harkin's sponsored amendments to the CFMA. HR 6604 passed in the House on September 18, 2008, and was sent to the Senate on September 23, 2008.
294. See FIA volume figures, which reflect an exponential increase.
295. See n.3 above.
296. 17 CFR Sec. 242.300.SEC Rule 11 Ac1-1, 17 CFR Sec. 240.11Ac1-5 and 11Ac1-6; for an international view, see: Report on Issues in the Regulation of Cross Border Proprietary Screen Based Trading Systems, IOSCO Library (1994).
297. Note, for example, the purchase by NYSE of Pacific Board of Trade's Archipelago and the choice of CEOs with IT expertise.
298. Volume in options was expected to materially increase.
299. Rules 600 to 612: 17 CFR 242-600 to 612.
300. The MiFID defines systematic internalizer as "an investment firm dealing on its own account to execute client orders outside a regulated market or a multilateral trading facility." It requires firm quotes on liquid shares when the firm is dealing in retail quantities. However, CESR guidance suggests a materiality threshold as to when internalizing orders is part of the commercial business model that is rather high.
301. See, e.g., Prospectus Directive.
302. These markets might appeal to third countries (non-EU participants) by permitting, for example, listing of non-International Financial Reporting Standards or nonprospectus directive-compliant products, or might be structured to avoid other aspects of the regulated regime.
303. See: Corporation of the City of London, "European Corporate Bond Markets, Transparency, Liquidity, and Efficiency" (May 2006).
304. http://www.cepr.org/PRESS/TT_CorporateFULL.pdf.
305. Toni Gravelle, Banque de Canada (2002); Ian Domowitz and Benn Steil, "Automation, Trading Costs, and the Structure of the Securities Trading Industry," Department of Economics and Institute for Policy Research, Northwestern University, 1997.
306. The CFTC was reauthorized in legislation known as CFTC Reauthorization Act of 2007. HR2419 eliminated the Enron loophole with respect to certain products and became law May 22, 2008.
307. See Section 409 of the Federal Deposit Insurance Corporation Act of 1991 as amended, which effectively permits a clearing agency registered under the U.S. securities laws, the CFMA, or is a foreign financial futures regulator that the U.S. Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the SEC, or the CFTC determine has satisfied appropriate standards.
308. Tokyo Communiqué.
309. http://www.cftc.org.
310. Report on the Permanent Subcommittee on Investigations, 2007, and the recent spate of legislation before Congress on energy and speculation (July 2008).
311. Policies on Error Trades, IOSCO Library (October 2005).
312. Roberta S. Karmel, "Turning Seats into Shares: Causes and Implications of Demutualization of Stock and Futures Exchanges," 53 Hastings, L. J. 367 (2002). For a comprehensive discussion of case studies, see: Akhtar, ed., "Demutualization of Stock Exchanges, Problems, Solutions and Case Studies," Asian Development Bank (2002).
313. Indeed, looking at this phenomenon another way, the club culture in some places was so dominant that, even today, the regulators must use "mercenary regulators" from other jurisdictions because of the difficulty of reintegrating regulatory enforcers after their government service into the business/exchange club.
314. The key regulatory issue is whether these changes will undermine the commitment of resources and capabilities by a stock exchange to effectively fulfill its regulatory and public interest responsibilities at an appropriate standard. The identified regulatory questions and concerns fall into three areas:.
315. See, for example, the Hunt silver case and the Feruzzi soybean case, which had international repercussions.
316. See Corcoran, "Autorégulation et contrôles opérationnels: réflexions sur la surveillance des produits dérivés négociés sur les marchés réglementés,"Revue d'economie financiere, no. 82 (2006); See also, Corcoran, "Self-Regulation and Derivatives Markets Governance: The U.S. Experience, Parts 1 and 2,"Futures & Derivatives Law Report, Vol. 27, Issues 10 and 11 (November and December, 2007).
317. See French, AFM Web site.
318. See, for example, the Tokyo Stock Exchange Web site. Interestingly, as reported in The Wall Street Journal, the move from private club to public company has had one possible business advantage: In the recent lawsuit in the United States over the compensation of Richard Grasso, former president and CEO of the New York Stock Exchange, the court found that the fact that the NYSE had become a public company before the pay package was implemented was a factor that prevented it from attack.
319. IOSCO Internet Task Force report (see above fn).
320. IOSCO strategy calls for the Multi-lateral Memorandum of Understanding on Cooperation and Mutual Assistance (MMOU) to be executed or committed to as a condition of membership by 2010.
321. Cite SEC initiative.
322. One of the first examples of a mutual recognition was the MRMOU (mutual recognition memorandum of understanding) negotiated under Article 175 authority of the U.S. State Department and a binding arrangement for the United States and the French, then COB, for which certain staff received the Legion d'honneur.
323. Prof. Eric J. Pan, "Why the World No Longer Puts Its Stock in Us," December 13, 2006, Cardozo Legal Studies Research Paper No. 175.
324. http://ssrn.com/abstract=951705.
325. See, e.g., Banque de Canada Financial Stability Report, 2007, at p. 45.
326. http://www.bank-banque-canada.ca/en/fsr/2007/fsr_1207.pdf.
327. CME (with CBOT and with the NYMEX); Nasdaq and OMX, NYSE-Euronext, TSE and Quebec, Winnipeg and ICE US, the Nordic Circle, Dubai/Doha interests in London, and so forth.
328. Corcoran, "Regulating Futures Markets, the Evolving Federalist Model,"Futures Industry Association Magazine, May/June 2007.
329. http://www.futuresindustry.org/fi-magazine-home.asp?a=1188.
330. Failure of France, the Netherlands, and now Ireland (the only EU member for which a referendum was required ) in the second round of processes to confirm the EU Constitution. Moreover, within Europe there are niche players (Luxembourg, Ireland, Austria). See: Ambassador Bruton, What Next? The Lisbon Treaty, the Irish Referendum and the Implications for the European Union.
331. http://www.eurunion.org/eu/index.php?option=com_content%26task=view%26id=2042.
332. Eddy Wymeersch, "The Future of Financial Regulation and Supervision in Europe,"Common Market Law Review, January 2005.
333. See Chapters 4, 6, and 7, Davies and Green, Global Financial Regulation, The Essential Guide, Polity Press, 2008.
334. See article by Carmine di Noia, 20 October 2008, which argues that regulation should be organized under four peaks at both the national and the European levels. These would be under a coordinator: the central bank, a prudential regulator, an investor protection regulator, and an antitrust authority.
335. http://voxeu.org/index.php?9=node12462.
336. See Speech by Sir Howard Davies, then Chairman of the FSA, 28 October 1997.
337. Finneran, John, "Technology Takes over NYSE," July 31, 2006.
338. http://www.fool.com/investing/high-growth/2006/07/31/technology-takes-over-the-nyse.aspx.
339. AEMS is a joint venture between Euronext and French integration company Atos Origin.
340. Finneran, John, "Technology Takes over NYSE," July 31, 2006.
341. http://www.fool.com/investing/high-growth/2006/07/31/technology-takes-over-the-nyse.aspx.
342. As of August 22, 2008, NYMEX is part of CME Group.
343. quot;History of CME Globex,".
344. http://www.cme.com/trading/get/abt/welcome/history.html.
345. quot;History of CME Globex,".
346. http://www.cme.com/trading/get/abt/welcome/history.html.
347. quot;Reuters and Forex to Launch the Global FX Marketplace," 4 May 2006.
348. http://www.finextra.com/fullstory.asp?id=15267.
349. CME had currency futures. By offering currency products available on Reuters, it provided new trading opportunities for the trading community.
350. Salcedo, Yesenia, "Can You Handle It." Futures, May 2004.
351. http://findarticles.com/p/articles/mi_qa5282/is_/ai_n24278530.
352. We will discuss the technology issues exchanges face in the next chapter.
353. CME essentially added separate hardware to run the Globex system for CBOT. So there is one set of hardware processing CME trading and another set of hardware for CBOT.
354. FIX is the standard protocol. FAST optimizes FIX to handle market data more efficiently.
355. CME already has pretty large bandwidth requirements. It requires its active traders to install a T3 line to connect to the exchange. Adding additional CBOT products and message traffic would have significantly increased the bandwidth requirements without FAST.
356. Salcedo, Yesenia, "Can You Handle It?"Futures, May 2004.
357. http://findarticles.com/p/articles/mi_qa5282/is_/ai_n24278530.
358. http://www.futuresindustry.org/fi-magazine-home.asp?a=1171#volumetables.
359. Leising, Matthew. "NYMEX Spent up to $20 Mln on London Trading Floor,".
360. (March 8, 2006d). http://www.bauer.uh.edu/spirrong/ATT00359.txt.
361. quot;Surge in Volume," FIA article.
362. NYSE acquired its electronic trading platform when it purchased ARCA and expanded its market share as well as electronic trading infrastructure through its recent merger with Euronext.
363. Nasdaq has been an electronic marketplace for quite some time but has grown significantly in recent years. Its latest merger was with the OMX Group, the Nordic exchange conglomerate.
364. quot;U.S. Equity Options Volume to Double by 2010-Study,".
365. (Feb. 21, 2008). http://uk.reuters.com/article/marketsNewsUS/idUKN212562012008022.
366. quot;U.S. Equity Options-Exchange Update,".
367. http://www.futuresindustry.org/fi-magazine-home.asp?a=1077.
368. quot;Surge in Volume," FIA article.
369. We will discuss product growth and innovation in the new product innovation chapter of this book.
370. E-mini S&P 500 is 1/5th the size of CME's S&P 500 futures contract. It closely tracks the price movement of the S&P 500 Index. "CME Expands Quarterly Month Listings of Equity Index Futures Products,".
371. (June 24, 2007). http://www.cme.com/trading/prd/equity/emini-sp500.html.
372. Markets in Financial Instrument Directive (MiFID) is the set of new regulatory mandates implemented by the European Union and designed to foster competition and protect consumers.
373. http://www.mifidirective.com/.
374. Innovators in Automatic trading.
375. http://www.rolfeandnolan.com.
376. Alternative Investment Management-Technology Outsourcing.
377. http://www.aim-to.com.
378. quot;Trading on Emerging and Frontier Markets.,".
379. http://www.gltrade.com.
380. Safarik Dan. "Direct Market Access-The Next Frontier,".
381. (Feb. 28, 2005). http://www.wallstreetandtech.com/advancedtrading/showArticle.jhtml?articleID=60404150.
382. quot;Order Types and Algos," Interactive Brokers.
383. http://www.interactivebrokers.com/en/p.php?f=orderTypes%26ib_entity=llc.
384. quot;Futures Algorithms Directory," Advanced Trading.
385. http://advancedtrading.thewallstreetwiki.com/directories/directory-futures-algorithms.php.
386. In futures markets, a trader generally traded a single product and often a single month of that product.
387. Subsidiary of Sungard.
388. Not all strategies are natively recognized by the exchange. For example, an exchange may not support a more exotic options strategy.
389. Moore, James, "Euronext Hit by System Faults,".
390. (May 17, 2003). http://www.telegraph.co.uk/finance/2852140/Euronext-hit-by-system-faults.html.
391. quot;London Exchange Paralyzed by Glitch Blow to a Market Facing New Rivals; Huge Trading Day,".
392. (Sept. 9, 2008). http://online.wsj.com/article/SB122088611707510173.html?mod=hpp_us_pageone.
393. Sessions after regular closing hours where trading can occur.
394. quot;History of New York Stock Exchange Holidays,".
395. (Nov. 2008). http://www.nyse.com/pdfs/closings.pdf.
396. quot;Software Bug Caused Tuesday's TSE Outage,".
397. (July 23, 2008). http://www.thetradenews.com/trading/exchange-traded-derivatives/2136.
398. quot;LIFFE Suffers Sixth Connect System Outage This Year,".
399. (Sept. 2001). http://64.233.169.132/search?q=cache:SxcjWqKJfhEJ:findarticles.com/p/articles/mi_hb5555/is_/ai_n21937801+liffe+system+outage%26hl=en%26ct=clnk%26cd=1%26gl=us.
400. Moore, James, "System Fault Forces LIFFE to Shut Down,".
401. (July 5, 2007). http://findarticles.com/p/articles/mi_qn4158/is_/ai_n19199066.
402. Euro Interbank Offered Rate (Euribor) are interest rate contracts.
403. U.K. government bonds.
404. Moore, James, "System Fault Forces Liffe to Shut Down,".
405. (June 5, 2007). http://www.independent.co.uk/news/business/news/system-fault-forces-liffe-to-shut-down-451780.html.
406. Waller, Martin, "London Stock Exchange Glitch Costs millions,".
407. (Sept. 9, 2008). http://business.timesonline.co.uk/tol/business/markets/article4710793.ece.
408. Shah, Neil, "London Exchange Paralyzed by Glitch Blow to a Market Facing New Rivals; Huge Trading Day,".
409. (Sept. 9, 2008). http://online.wsj.com/article/SB122088611707510173.html?mod=hpp_us_pageone.
410. Wearden, Graeme, and Tryhorn, Chris. "Seven-Hour Outage Creates City Chaos,".
411. (Sept. 8, 2008). http://www.guardian.co.uk/business/2008/sep/08/freddiemacandfanniemae.creditcrunch.
412. Sakoui, Anousha, "Trading Halted on London Stock Exchange,".
413. (Sept. 8, 2008). http://us.ft.com/ftgateway/superpage.ft?news_id=fto090820080742439122%26page=2.
414. quot;Electronic Trading at CBOE Interrupted,".
415. (Nov. 10, 2006). http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-11945248.htm.
416. The cause of the system issues was not provided by the exchange. However, the issues were resolved, and the electronic trading system was available on Monday.
417. CBOE Futures Exchange lists some of the proprietary index, including the CBOE Volatility Index.
418. Automated news grabber that scours the Internet to grab news article and displays them when a user searches on a Google search engine.
419. Baer, Justin, "United shares plunge on old news story,".
420. (Sept. 8, 2008). http://www.ft.com/cms/s/0/b843a240-7ddd-11dd-bdbd-000077b07658.html?nclick_check=1.
421. Brown, Jeffery, "United Airlines Tallies Damage from False Stock Report,".
422. http://www.pbs.org/newshour/bb/media/july-dec08/unitedstock_09-09.html.
423. Helft, Miguel, "How a Series of Mistakes Hurt Shares of United,".
424. (Sept. 14, 2008). http://www.nytimes.com/2008/09/15/technology/15google.html.
425. Regan, Keith, "Computer Glitches Heaped Fuel on Stock Sell-Off,".
426. (March 1, 2007). http://www.ecommercetimes.com/story/56032.html?wlc=1222521986%26wlc=1222648420.
427. Salisbury, Ian, and Rogow, Geoffery. "Glitches Cancel Electronic Trades,"Wall Street Journal.
428. (Sept. 24, 2008). http://www.marketwatch.com/news/story/glitches-cancel-electronic-trades/story.aspx?guid=%7B76F833E8-6A8E-4C57-9865-7B418F9DCFC7%7D.
429. Goldman, David, "SEC Bans Short-selling. Agency puts temporary halt to trading practice that 'threatens investors and capital markets' for 799 financial companies,".
430. (Sept. 19, 2008). http://money.cnn.com/2008/09/19/news/economy/sec_short_selling/?postversion=2008091907.
431. The ban ended on October 8, 2008.
432. The exact reason for the price fluctuation was not disclosed by the exchange.
433. The exchange did not disclose details of the glitch or the exchange it received the order from.
434. quot;Erroneous Orders Routed to NASDAQ Result in Cancelled Trades,".
435. (New York, Sep. 30, 2008). http://www.nasdaq.com/newsroom/news/newsroomnewsStory.aspx?textpath=pr2008%5CACQPMZ200809301844PRIMZONEFULLFEED151328.htm%26cdtime=09%2f30%2f2008%20+6%3a44PM%26title=Erroneous%20Orders%20Routed%20to%20NASDAQ%20Result%20in%20Cancelled%20Trades.
436. Rooney, Ben, "Google Price Corrected After Trading Snafu. Closing price adjusted after shares of the tech giant plummet due to erroneous trade. Change to final Nasdaq value to follow,".
437. (Sept. 30, 2008). http://money.cnn.com/2008/09/30/news/companies/google_nasdaq/index.htm.
438. Wallace, Bruce, "Trading Blunder Raises Concerns about the Tokyo Stock Exchange,".
439. (Dec. 14, 2005). http://articles.latimes.com/2005/dec/14/business/fi-nikkei14.
440. McCurry, Justin, "Too Fat, Too Fast. The £1.6bn Finger,".
441. (Dec. 9, 2005). http://www.guardian.co.uk/business/2005/dec/09/japan.internationalnews.
442. McCurry, Justin, "Too Fat, Too Fast. The £1.6bn Finger,".
443. (Dec. 9, 2005). http://www.guardian.co.uk/business/2005/dec/09/japan.internationalnews.
444. Wilkinson, Tara Loader. "The fat finger points to trouble for traders,".
445. (Mar. 14, 2007). http://www.efinancialnews.com/usedition/index/content/2447370453.
446. Edqar Ortega, "Nasdaq and Goldman Set Their Sights on Philadelphia Stock Exchange,".
447. (Oct. 22, 2007). http://www.iht.com/articles/2007/10/21/bloomberg/bxexchange.php.
448. quot;NASDAQ to Acquire Philadelphia Stock Exchange,".
449. http://www.nasdaq.com/newsroom/news/newsroomnewsStory.aspx?textpath=pr2007%5CACQPMZ200711070730PRIMZONEFULLFEED130788.htm.
450. quot;NASDAQ to Acquire Philadelphia Stock Exchange,".
451. http://www.nasdaq.com/newsroom/news/newsroomnewsStory.aspx?textpath=pr2007%5CACQPMZ200711070730PRIMZONEFULLFEED130788.htm.
452. Dora, James, "The Mating Game: Exchange Consolidation Hits a Fever Pitch,".
453. http://www.futuresindustry.org/fi-magazine-home.asp?a=1219.
454. Dora, James, "The Mating Game: Exchange Consolidation Hits a Fever Pitch,".
455. http://www.futuresindustry.org/fi-magazine-home.asp?a=1219.
456. Scherer, Ivy, "Exchange Consolidation Wave Is Expected to Continue in 2008. U.S. exchanges are seeking mergers overseas and looking to consolidate with U.S. regional exchanges to diversify into multiple asset classes and cut technology costs,".
457. (October 31, 2007). http://www.advancedtrading.com/crossingnetworks/showArticle.jhtml;jsessionid=XBDDMTPQANXHKQSNDLOSKH0CJUNN2JVN?articleID=202800838%26_requestid=140313.
458. Kim Jim. "Chi-X Faring Well Still in Europe,".
459. (Oct. 2008). http://www.fiercefinanceit.com/story/chi-x-faring-well-still-europe/2008-10-08.
460. Randal, Peter, "New Super-speed Competition,".
461. (April 2007). http://www.ftmandate.com/news/fullstory.php/aid/1414/New_super-speed_competition.html.
462. Grant, Jeremy, "The Fast Bowlers Arrive,".
463. (Aug. 31, 2008). http://www.ft.com/cms/s/0/eea60bbc-7788-11dd-be24-0000779fd18c.html?nclick_check=1.
464. Webster, Paul, "A Need for Speed: The Rise of Algorithmic Trading,".
465. (Canadian business online June 5, 2007). http://www.canadianbusiness.com/innovation/article.jsp?content=20070605_142120_1116.
466. http://www-03.ibm.com/industries/financialservices/doc/content/bin/fss_latency_arms_race.pdf.
467. quot;Algorithmic Trading: Behind the trade,".
468. (June 2007). http://www.ibspublishing.com/index.cfm?section=TRP%26action=view%26id=10831.
469. quot;Network Access Options,".
470. http://www.cme.com/trading/get/trad/netaccopt.html.
471. NYSE Transact Tools.
472. http://www.nysetransacttools.com/news/wp-content/uploads/2007/12/sfti_bandwidth_guidelines_tt.pdf.
473. Rabkin Martin, "Investment on High-Speed, Advanced-Trading Infrastructure Value Chain across Asset Classes to Hit $860M in 2007, Rising to $1.3B by 2010, Says TABB Group,".
474. http://www.tabbgroup.com/PageDetail.aspx?PageID=16%26ItemID=48.
475. Luke Jeffs, "European Exchanges Focus on Execution Speed,".
476. (July 30, 2008). http://www.efinancialnews.com/usedition/content/2451371489.
477. Luke Jeffs, "European Exchanges Focus on Execution Speed,".
478. (July 30, 2008). http://www.efinancialnews.com/usedition/content/2451371489.
479. http://www.rblt.com/documents/SIN100807.pdf.
480. Whitney, Tina, "The Need for Speed: Market Data Vendors Ramp Up Offerings,".
481. (June 10, 2004). http://www.wallstreetandtech.com/news/trading/showArticle.jhtml?articleID=21700216.
482. Eugene Grygo, "Brokers in Battle for Algo Market,".
483. (Apr. 28, 2008). http://www.efinancialnews.com/tradingandtechnology/index/content/2450491046.
484. Whitney, Tina, "The Need for Speed: Market Data Vendors Ramp Up Offerings,".
485. (June 10, 2004). http://www.wallstreetandtech.com/news/trading/showArticle.jhtml?articleID=21700216.
486. The proposal is pending approval of both LCH.Clearnet and U.K. regulators.
487. quot;Liffe to Move into Clearing - Bloomberg"; London-based derivatives exchange Liffe is planning to enter the clearing business in a bid to fight off competition from Project Rainbow, the European exchange being set up by investment banks, according to a Bloomberg report.
488. (Feb. 27, 2008). http://www.finextra.com/fullstory.asp?id=18151.
489. http://www.ipe.com/articles/print.php?id=29211.
490. Peggy Bresnick Kendler, "DTCC, LCH.Clearnet Announce Plans to Merge and Create Single Clearing House; The merger proposal aims to create the world's leading clearing house,"Bank Systems & Technology.
491. (October 22, 2008). http://www.banktech.com/payments-and-cards/showArticle.jhtml?articleID=211600050.
492. Any excess left over after the operating expenses are covered will be returned to the users in the form of rebates.
493. quot;We're Ahead in CDS Clearing Race, Claims Liffe,".
494. (Oct. 23, 2008). http://www.fointelligence.com/Article/2034529/Were-ahead-in-CDS-clearing-race-claims-Liffe.html.
495. Will Acworth, "Clearing the Deck: Credit Derivatives Market Moves Closer to Clearing Solution,".
496. http://www.futuresindustry.org/fi-magazine-home.asp?a=1255.
497. quot;BNY Brokerage Provides Access to Trading Algorithms through Bloomberg Professional Service,".
498. (February 14, 2006-BNY Brokerage, a subsidiary of The Bank of New York). http://www.bobsguide.com/guide/news/2006/Feb/14/BNY_Brokerage_Provides_Access_to_Trading_Algorithms_through_Bloomberg_Professional_Service.html.
499. Currently there are two platforms: NYSE Arca for US Options and LiffeConnect for European options trading.
500. Sherree DeCovny, "Transatlantic Connections: Exchanges Link U.S. and European Options Markets,".
501. (Oct. 2008). http://www.futuresindustry.org/fi-magazine-home.asp?a=1269.
502. The common clearing link is currently under regulatory approval. Eurex, ISE, and the OCC expect to provide the transatlantic link by the second half of 2009.